Note: the Court of Appeal, in a
decision dated 6 September 2007, upheld the judgment of the Commercial
Court. To access the note on the Court of Appeal decision, click here However, in a judgment delivered on 9 July 2008, the House of Lords reversed
the decision of the Court of Appeal. For a note on the House of Lords judgment,
click here

http://www.bailii.org/ew/cases/EWHC/Comm/2006/3030.html
Dominic Kendrick QC (instructed by Swinnerton Moore) for the Claimant-Charterer
Simon Croall (instructed by Bentley Stokes & Lowless) for the Defendant-Shipowner
TIME CHARTERPARTY: LATE REDELIVERY: FAILURE TO DELIVER WITHIN LAYCAN OF NEXT
FIXTURE: RENEGOTIATION OF HIRE RATE FOR NEXT FIXTURE IN ACCORDANCE WITH LOWER
PREVAILING MARKET RATES: CONSEQUENTIAL LOSS OF HIRE: RECOVERABILITY OF DAMAGES:
REMOTENESS OF LOSS
Summary
Where a time charterparty had no unusual provisions or features and a failure to
redeliver the vessel in time for its next fixture led to a loss of profit over
the period of the next fixture, being the difference between the original hire
rate and the renegotiated lower market hire rate, the shipowner’s claim for
damages against the redelivering charterer was not too remote, being a not
unlikely result of late redelivery.

Background
This was a claim by way of appeal under s.69 of the Arbitration Act (to set
aside an arbitration award) on a point of general public importance to the
shipping community – whether loss of earnings under a subsequent fixture is
recoverable under the rule in Hadley v Baxendale (1854) 9 Exch 24.1

The parties to the dispute were Transfield ("the charterer")
and Mercator ("the shipowner"). The claim arose because the charterer
was late in redelivering the vessel in accordance with the terms of its
charterparty with the shipowner ("the Transfield charter");
specifically, a failure to comply with the redelivery dates given in the
contractually required notices of redelivery.

The shipowner had already agreed a charterparty with Cargill
("the Cargill charter") which was to commence no later than 8 days
after the vessel was expected to be redelivered at the latest on the basis of
the redelivery notices given under the Transfield charter. As a result of the
late redelivery, the vessel was unable to meet the cancelling date originally
agreed in the Cargill charter. As a result, Mercator then had to renegotiate the
delivery date with Cargill in return for which Cargill obtained a reduction in
the rate of hire.

The shipowner claimed damages from the charterer at the rate of
US$8,000 per day, being the difference between the US$39,500 per day rate
originally agreed for the Cargill charter and the revised US$31,500 per day
rate, against which the shipowner gave credit for the additional sums earned
under the Transfield charter by reason of the late redelivery. The Cargill
charter was for a period of about 4-6 months. The claim for hire lost over the
period of time used within the Cargill charter amounted to US$1,364,584.37.

The parties agreed that the rates originally and subsequently
negotiated under the Cargill charter were market rates. The charterer did not
suggest that the Cargill charter was in any way unusual or peculiar in its terms
or its period. Nor did the charterer suggest that the shipowner had allowed an
unusually short gap between the date for redelivery under the Transfield charter
and the cancelling date under the Cargill charter.

In the alternative the shipowner claimed damages of
US$158,301.17 being the difference between the market rate of hire and the
Transfield charter rate during the period from the expected latest date of
redelivery in the notices until the actual date of redelivery.

The majority arbitrators (Mr David Farringdon and Mr Bruce
Buchan) made an award in the shipowner’s favour, calculated on the former
basis. The charterer contended that the award should have been calculated on the
latter basis, which was the award that the minority arbitrator (Mr Christopher
Moss) would have made.

The majority arbitrators had found on the facts that:

to the knowledge of the charterer, it was recognised and accepted as a
hazard of late redelivery that the vessel would miss her cancellation date
for the next fixture;

this was not something that was very unusual but was the kind of result
which the parties would have had in mind;

rapid variations in market rates in either direction were market
knowledge; and

the kind of loss suffered by the shipowner – a reduction in the
previously agreed rate of hire resulting from the need to adjust the dates
for the subsequent employment of the vessel on account of delay in
redelivery – was within the contemplation of the parties as a not unlikely
result of the breach.

Judgment
Authorities on Late Delivery
The judge was referred to the leading authorities on late delivery: including The
"London Explorer" [1972] AC 1, The "Dione" [1975]
I Lloyd’s Rep 117, The "Johnny" [1977] 2 Lloyd’s Rep 1 The
"Peonia" [1991] I Lloyd's Rep 100 and The "Gregos"
[1991] 2 Lloyd’s Rep 40.

The judge noted that there were a number of statements from
distinguished commercial judges that the prima facie measure of damages
for late redelivery, under the first limb of Hadley v Baxendale,1
was the difference between the market and charterparty rates for "the
overrun period" (i.e. the number of additional days by which the
charterparty overran). The Court of Appeal in The "Gregos" also
proceeded on an apparent acceptance that it was under the second limb of the
rule that loss of a subsequent fixture was recoverable, if at all.

But in none of these cases, highlighted the judge, was the
question of recoverability of loss of profit on a subsequent charter actually in
issue. Nor were there any findings of fact such as those made by the majority
arbitrators. Whilst these cases were authority for the proposition that, absent
any such finding, the shipowner is entitled to recover the going market
charterparty rate differential, they could not, held the judge, be regarded as
deciding that, even with such a finding, recovery of loss of profit on a
subsequent fixture could not arise under the first limb or could not be
recovered at all.

The Rule in Hadley v BaxendaleHaving cited the rule in Hadley v Baxendale,1 the judge
analysed the leading authority of The "Heron II" [1969] 1 AC
350.

The judge helpfully derived the following propositions from the
speech of Lord Reid:

"(a) The mere fact that a type of loss is foreseeable is
not, of itself, sufficient to make it recoverable; someone may foresee a result
that is very remote.

(b) A claimant is, however, entitled to recover damages in
respect of a foreseeable result which either (i) will happen in the great
majority of cases; or (ii) in respect of which, on the facts known or available
to the defendant, the chances of its happening are considerably less than evens
but the occurrence of which would not be very unusual.

(c) But a plaintiff is not entitled to recover in respect of an
occurrence which, although foreseeable as a substantial possibility will only
happen in a small minority of cases and whose occurrence would therefore be very
unusual."

The judge also pointed out the limitations of trying to
compartmentalise claims within the first or second limb, particularly "as
the distinction may not be important for practical purposes", for example,
where the claimant will recover for the loss in any event.

Conclusions
The judge held that, on the facts found by the majority arbitrators, the
shipowner’s primary claim was not too remote. The shipowner’s loss of profit
could, in the light of those findings, legitimately be treated as "arising
naturally, that is, according to the usual course of things from such breach of
contract itself".

The judge stated:

"In considering the first limb [of Hadley v Baxendale],
the court is not constrained to look at what people with not even a minimum
knowledge of the shipping trade would contemplate. The court is entitled to look
at the ‘general… facts …., known to both parties’: per Lord
Upjohn in The "Heron II" at page 424; and ‘such knowledge
and information as (the contract breaker), as reasonable men (sic), experienced
in its trade, should have had and should have brought to bear in its
contemplation’: per Davies LJ in Hill v Ashington Piggeries [1969]
3 All ER 1496, at page 1524 D."

Comment
There is no longer a clear distinction made between the first limb and the
second limb of the test for remoteness of loss in contract, following a line of
strong authorities that have more fully developed the concept. The limbs are
part of a composite whole where the application of the principle depends on the
degree of relevant knowledge (reasonably presumed to be or actually) held by the
contract breaker at the time of entering the contract in the particular case.

As a result, a major factor in determining whether a loss for
the purposes of a contractual claim is too remote now appears to be whether any
special, unusual, technical or peculiar information was actually known only to
one party and could not reasonably be attributed to the knowledge of the other
party at the time of entering the contract.

For an extreme example, knowledge of the need for a continuous
pour of concrete in a large civil engineering project to avoid the condemnation
of the whole civil structure was beyond the reasonable contemplation of an
electricity supplier, where the inability to maintain a continuous pour arose
from a power supply failure: Balfour Beatty Construction (Scotland) Ltd v
Scottish Power plc (1994) Times, 23 March (HL).

Such losses, from a policy perspective, are considered too
remote because had the special, unusual, technical or peculiar information
reasonably been brought to the attention of the ignorant party it would have
been in a position to appreciate its significance and the not unlikely
consequences involved should a breach of contract later occur. That party could
then either accept the unusual risks or negotiate terms in the contract to
exclude, assign, apportion or limit the consequences.

Consequently, as the present case demonstrates, those in the
same or similar industries and those having dealings with other industries as a
matter of course (for example, shipowners as regards international commodity
traders and vice versa) are much more likely to be deemed to have a wider
shared knowledge of normal industry practices and market behaviour.

Footnote:

1. The damages a claimant may recover for breach of contract are
"such as may fairly and reasonably be considered either (a) arising
naturally i.e. according to the usual course of things from such breach of
contract itself or (b) such as may reasonably be supposed to have been in the
contemplation of the parties, at the time they made the contract as the probable
result of it."

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